Kinder Morgan Energy Partners LP (KMP) is a pipeline transportation and energy storage company in North America and one of the largest master limited partnerships. Since our last article of "Kinder Morgan: Trading Downside And Investing For Long Term Through Options," KMP had hit the bottom intra-day low at $74.76 on November 15, 2012 and had closed higher at $88.65 on January 18, 2013. The reviewed Dec. 22, 2012 $77.5 put would have yielded good profit when KMP fell to $74.76 low while the credit put position of March 16, 2013 $72.5/$77.5 put could be closed with a decent return on margin now or could potentially generate the maximum profit if KMP closes above $77.5 upon options expiration. In this article, new developments will be updated for KMP and a new options strategy will also be reviewed.
7 Bullish Factors
- Increasing volume and profit. For Q4, 2012, KMP earned 75 cents per limited partner unit (excluding certain items) from continuing operations, beating the Zacks Consensus Estimate of 67 cents. The outperformance was mainly attributable to higher volumes in its interstate pipeline network. The full-year 2012 earnings of $2.31 per unit also exceeded analysts' expectation of $2.23 and improved from the year-ago earnings of $1.72 a unit.
- Growing distributable cash flow. The distributing cash flow increased 16.47% to $495M from $425M in the year-ago period.
- Increasing cash distribution. KMP increased its quarterly cash distribution per common unit to $1.29 ($5.16 annualized) payable on February 14, 2013 to unitholders of record as of January 31, 2013. Since current management took over in February 1997, KMP had increased the distribution 46 times.
- Expanding pipelines. KMP is expanding and converting its pipelines around North America, including a $450 million addition to its Tennessee Gas system in Pennsylvania and New Jersey. Kinder Morgan is seeking regulatory approval for a $200 million project to increase natural gas exports to Mexico via the Sierrita pipeline, which would run near Sasabe, Arizona. On January 14, 2013, KMP announced its $170M investment to expand its Houston oil and gas pipelines terminal network as part of infrastructure boosting efforts to meet the growing demand for storage and dock services along the Gulf Coast.
- Analyst's call. Scott Elvira, analyst at RBC, said "We believe the El Paso acquisition provides visible growth at KMP and EPB over the next few years and, consequently, highly visible cash-flow growth at KMI. Project backlog of $12 billion-plus across the Kinder Morgan entities provides additional visibility into longer term growth at KMP, EPB and KMI."
- Fundamentally, KMP is profitable with an operating margin of 26.75% with a profit margin of 15.49%, ttm. KMP has a year-over-year quarterly earnings growth of 29.30%. KMP had been increasing its free cash flow consistently since 2009.
- Technically, KMP is bullish with the MACD (12, 26, 9) showing a bullish trend and the RSI (14) indicating a strong bullish momentum. RSI (14) at 77.73 is considered as in the over-bought territory. KMP is currently trading above its 50-day MA of $81.44 and 200-day MA of $80.14, as seen from the chart below.
- Credit Suisse cut KMP from an outperform rating to a neutral rating on January 17, 2013.
- Short-term overbought concern. There is short-term over-bought concern with RSI (14) in the over-bought territory (above 70). KMP had a nice rally since the late December, 2012 and some short-term consolidation is highly possible.
For bullish KMP investors, a credit put spread will be reviewed, which will allow investors to acquire KMP at a lower price while gaining some upside potentials.
- Short 1x June 22, 2013 put at the strike price of $80.00 for the credit of $1.40
- Buy 1x June 22, 2013 put at the strike price of $77.50 for the cost of $0.98
The maximum profit is $0.42, and the maximum risk/margin requirement is $2.08 ($2.50 loss - $0.42 credit received). If KMP closes above $80.00 on June 22, 2013, 20.19% return on margin will be gained. If KMP falls below $80.00 upon options expiration, KMP stock will be acquired at $79.58, which is 10.23% lower than the current price of $88.65.
Note: All prices are quoted from the closing of January 18, 2013 and all calculations are before fees and expenses. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in KMP over the next 72 hours.